The Effect of Financial Innovation on Economic Growth: A Theoretical Model

In contrast to the abundant theoretical literature on the finance-growth nexus, there is a lack of research that directly examines the impact of financial innovation on growth models. This study proposes a theoretical model that systematically interprets the transmission mechanism of how financial innovation affects economic growth. By establishing a paradigmatic economy, the research constructs a model based on the microeconomic foundations of four main agents: households, financial innovators, financial intermediaries, and firms. The influence of financial innovation on economic growth is examined through the actions of each agent. The results of the model demonstrate a positive external effect of existing financial innovations leading to the creation of new financial innovations. Additionally, new financial innovations enhance the efficiency of financial intermediaries. Moreover, an increase in financial intermediary efficiency leads to higher savings and investment. Consequently, new financial innovations contribute to the enrichment of the capital stock and have a positive impact on economic growth. This research provides a theoretical basis for conducting empirical studies and implementing policies.

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